Is King Digital's Candy Crush IPO Too Good to Be True?

King Digital could be a fad, even if the company is wildly profitable.

NEW YORK (TheStreet) -- King Digital Entertainment, maker of the popular mobile game Candy Crush Saga, generated $4.38 in diluted earnings per share in 2013, meaning that as the company seeks to list its shares on public stock markets it may carry a more palatable valuation than recent high-profile IPOs such as Twitter (TWTR), Facebook (FB), Zynga (ZNGA) and Groupon (GRPN). But King Digital's exceptional profitability may actually present a big risk for prospective investors.

King Digital will have to prove that it isn't a fad, an issue that has plagued Zynga since its IPO and a moderation of user engagement with the company's linchpin FarmVille game. King Digital, by way of its addictive Candy Crush Saga game, faces a similar risk, if not, magnified risks for investors.

King Digital's current business model goes as follows: The company offers mobile and desktop gamers its popular games for free, meaning that King Digital's over quarter billion user base isn't necessarily responsible for the company's earnings. King Digital generates revenue by selling virtual items to a subset of players "who wish to enhance their entertainment experience," the company stated in its F-1 IPO filing with the Securities and Exchange Commission.

In 2013, King Digital generated nearly $1.9 billion in sales and GAAP net income of $567 million. Non-GAAP metrics like gross bookings and adjusted earnings before interest, taxes, depreciation, amortization (EBITDA) came in at $2 billion and $824 million, respectively, in 2013, representing adjusted EBITDA margins of 44% for the year.